Evidence

Question 1

What are financial statement assertions?

Answer 1

Auditor must have documentary evidence of procedures necessary to support their conclusions in the future

Objective of audit testing to identify material misstatement
Can only be based upon a series of detailed tests, each designed with specific testing objective relating to certain areas of financial statements

Question 2

What are inventory balances?

Answer 2

Many ways inventory could be misstated:

• Items missed out
• Items from next accounting period included
• Not valued at lower of cost and net realisable value
• Damaged or obsolete
• Purchase cost incorrect
• Inadequate stock count

Thus auditors perform a range of tests – financial statements assertions

Question 3

What are financial statement assertion examples?

Answer 3

Transaction and event:
Occurrence
Completeness
Accuracy
Cut off
Classification

Account balances:
Existence
Rights and obligations
Completeness
Valuation and allocation

Presentation and Disclosure:
Occurrence and rights and obligations
Completeness
Classification and understandability
Accuracy and valuation

Question 4

Financial statement assertations : Short?

Answer 4

Occurrence – did the transactions and events recorded actually occur and relate to the entity?
Completeness – have all transactions, assets, liabilities and equity interests been recorded?
Accuracy – have amounts, data and other information been recorded and disclosed appropriately?
Cut-off – have transactions and events been recorded in the correct accounting period?
Classification and understandability – have transactions and events been: recorded in the proper accounts; and described and disclosed clearly?
Existence – do assets, liabilities and equity interests exist?
Rights and obligations – does the entity hold or control the rights to assets and are liabilities the obligations of the entity?
Valuation and allocation – are assets, liabilities and equity interests included in the financial statements at appropriate values?

Question 5

What should the auditor test for in relation to income and expenses on the income statement?

Answer 5

Occurrence
Completeness
Accuracy
Cut-off
Classification

Question 6

What should the auditor test for in relation to account balances recorded on SFP?

Answer 6

Existence
Rights and obligations
Completeness
Valuation and allocation

Question 7

Assertions relevant to disclosures are?

Answer 7

Occurrence
Rights and obligations
Completeness
Classification and understandability
Accuracy and valuation

Question 8

What are the 4 key questions and their assertations?

Answer 8

Should it be on the accounts at all?
Occurrence, existence, rights and obligations, cut-off

Is it included at the right value?
Accuracy, valuation

Is there anymore?
Completeness

Is it properly disclosed?
Allocation
Understandability

Question 9

What are the 8 audit procedures?

Answer 9

Inspection of records or documents
Inspection of tangible assets
Observation
Enquiry
Confirmation
Recalculation
Reperformance
Analytical procedures

Question 10

When designing tests to perform on a building (eg freehold property), the auditor would consider?

Answer 10

Existence – Inspect the property concerned
2. Valuation
- Agree the cost to the original contract of purchase
- Inspect subsequent revaluation reports
- Re-perform depreciation calculation
3. Rights and obligations – Inspect title deeds
4. Completeness
- Review the repairs account to ensure that items of a capital nature have not been expensed
- Inspect correspondence with lawyers and consultants for evidence that there are no additional properties or construction costs

Question 11

What is the simplified audit procedures?

Answer 11

Analytical review
Enquiry and confirmation
Inspection of documents and assets
Observation
recalcUlation and reperformance

Question 12

What are analytical procedures?

Answer 12

Planning and completion stages
Here, use as substantive procedures ie procedures designed to detect misstatement
Used to identify trends and understand relationships between sets of data
Identifies possible sources of misstatement
Not used in isolation but coupled with other, corroborative, forms of testing, such as enquiry of management
Prior year, budgets and industry comparison
Ratio and trend analysis
Proof in total
Difficult to use if operations changed significantly from previous year or a number of one-off events in the year

Question 13

What are key ratios to use?

Answer 13

Profitability
- Gross profit %
- Net profit %
Efficiency
- Receivables days
- Inventory Turnover
- Payables days
Liquidity
- Current/quick ratio
- Gearing
Return
- Return on capital employed (ROCE)

Question 14

Suitability of analytical procedures as substantive tests depends on what 4 factors?

Answer 14

1. The assertion/s under scrutiny
2. The reliability of the data
3. The degree of precision possible
4. The amount of variation which is acceptable

Question 15

What is sufficient appropriate evidence?

Answer 15

Depends on:
The risk assessment (of material misstatement)
The quality of evidence available
The purpose of the procedure (test of control or substantive test?)
ISA 500 Audit Evidence
“ The objective of the auditor is to design and perform audit procedures in such a way to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.”
Matter of professional judgement
But auditor must consider:

The risk of material misstatement
The results of controls tests
The size of the population being tested
The size of the sample selected to test
The quality of the evidence obtained

Question 16

Appropriateness of evidence according to?

Answer 16

Reliability – more reliable when:
Obtained from an independent external source
Generated internally but subject to effective control
Obtained directly by the auditor
In documentary form
In original form

Relevance (addresses the objective/purpose of a procedure and the assertion being considered). For example:
Tests of controls are designed to evaluate operating effectiveness of controls in preventing or detecting and correcting material misstatement
Substantive procedures are designed to detect material misstatement

Question 17

What is sampling?

Answer 17

Impossible to test every item in an accounting population due to costs
Auditor gives reasonable not absolute assurance (not certifying financial statements are 100% accurate)
Audit evidence gathered on a test basis
ISA 530 Audit Sampling
“The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population”

Question 18

What is statistical sampling?

Answer 18

Statistical uses:
- Random selection of samples
- Probability theory to evaluate sample results

Question 19

What is non-statistical sampling?

Answer 19

Any approach that does not have both these characteristics is considered to be non-statistical sampling
Approach taken is matter of auditor judgement
Bias? But supports risk based approach – focus on those areas most susceptible to material misstatement
Usually leads to focus on higher value items – common practice

Question 20

When designing a sample the auditor should consider?

Answer 20

The purpose of the procedure
The combination of the procedures being performed
The nature of evidence sought
Possible misstatement conditions

Question 21

What are the principle methods of sample selection?

Answer 21

Random – use of random number tables
Systematic selection – sampling interval used (every 50th)
Monetary unit selection (higher value items)
Haphazard selection – no structured technique but avoids bias or predictability
Block selection – selection of items next to each other. Rarely appropriate.

Sample size depends on level of sampling risk that auditor is willing to accept
To reduce sampling risk, auditor needs to increase size of sample selected

Question 22

What are the benefits of smaller entities?

Answer 22

Lower risk
Direct control by owner managers
Simpler systems
Fewer transactions

Question 23

What are the limitations of smaller entities?

Answer 23

Management override
No segregation of duties
less formal approach

Question 24

What are the potential problems with auditing not-for profits?

Answer 24

Some may have weaker systems due to lack of segregation of duties, use of volunteers, use of less formalised systems and controls
With many charities, much of income received is donations (unaccompanied by invoices, orders or despatch notes)
Assessing going concern more difficult

Audit implications